Central Banks Have a $13 Trillion Problem

Summary:
Paycheck to Paycheck
GUALFIN, ARGENTINA – The Dow was down 118 points on Wednesday. It should have been down a lot more. Of course, markets know more than we do. And maybe this market knows something that makes sense of these high prices. What we see are reasons to sell, not reasons to buy.
Nearly half of all American families live “paycheck to paycheck,” say researchers. Without borrowing, 46% couldn’t raise 0 to cover an emergency. This is at least part of the reason why retail sales dropped for the second month in a row in March. Despite seven years of economic “recovery,” millions of Americans don’t have much money.
According to Census Bureau figures, 110 million Americans receive benefits from means-tested federal programs – food stamps, disability, and the like. And according to the Bureau of Labor Statistics, about 125 million Americans have full-time work (with another roughly 112 million without jobs).
Dow Jones Industrial Average Index, September 2016 - May 2017(see more posts on Dow Jones Industrial Average, ) - Click to enlarge
That means there are only 125 million people in full-time jobs supporting the whole kit and caboodle of the U.S. economy, with a total population of 323 million. At that rate, each full-time worker supports about 2.

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Paycheck to Paycheck

GUALFIN, ARGENTINA – The Dow was down 118 points on Wednesday. It should have been down a lot more. Of course, markets know more than we do. And maybe this market knows something that makes sense of these high prices. What we see are reasons to sell, not reasons to buy.

Nearly half of all American families live “paycheck to paycheck,” say researchers. Without borrowing, 46% couldn’t raise $400 to cover an emergency. This is at least part of the reason why retail sales dropped for the second month in a row in March. Despite seven years of economic “recovery,” millions of Americans don’t have much money.

According to Census Bureau figures, 110 million Americans receive benefits from means-tested federal programs – food stamps, disability, and the like. And according to the Bureau of Labor Statistics, about 125 million Americans have full-time work (with another roughly 112 million without jobs).

Dow Jones Industrial Average Index, September 2016 - May 2017

That means there are only 125 million people in full-time jobs supporting the whole kit and caboodle of the U.S. economy, with a total population of 323 million. At that rate, each full-time worker supports about 2.6 people… including almost one person receiving money from the feds.

They are also supporting a government debt of $20 trillion and private debt of another $40 trillion or so. That puts the debt-to-full-time-worker ratio at $480,000. The average salary for a full-time worker is just $48,000. At a modest 5% interest, his share of the debt cost would set him back $24,000 each year.

He’d have only the remaining $24,000 to support (1) his own family… and (2) all the malingerers, cronies, and zombies who are drawing government benefits. Obviously, those numbers don’t work. But they explain much of the weakness in the U.S. economy.

The feds’ cheap credit keeps moving money (mostly in the form of asset price increases) to the wealthiest ZIP codes… while the average person’s budget gets tighter and tighter.

US Real Average Household Income By Quintile And Top 5 Percent, 1965 - 2015

Crisis Level

Foot traffic in chain restaurants is dropping, too. It’s down 3.4% from last month year over year. And all across the country, retail stores are closing their doors and shuttering their windows as though a hurricane were coming. And maybe it is…

Household debt is once again at more than $14 trillion – the level that set off the crisis of 2008–’09. At that level, consumers have a hard time spending. Despite these warnings, the Fed is still patting itself on the back. Bloomberg:

The economy continued to grow across the U.S. at a modest-to-moderate pace in recent weeks as a tight labor market helped broaden wage gains, though consumer spending was mixed, a Federal Reserve survey showed Wednesday.

Not only that, it is still talking about undoing the damage it has done over the past eight years, hoping to get down from its debt-mountain perch without breaking any bones. Bloomberg again:

After heading into the uncharted territory of quantitative easing [QE], the world’s central banks are starting to plan their course through the uncharted waters of quantitative tightening.

How the Federal Reserve, European Central Bank and – eventually – the Bank of Japan handle the transition could make the difference between a global rerun of the 2013 “taper tantrum,” or the near undetectable market response to China’s run-down of U.S. Treasuries in recent years.

Combined, the balance sheets of the three now total about $13 trillion, equating to greater than either China’s or the euro region’s economy.

Easy-Peasy

Let’s see… central banks began buying debt eight years ago. Now they own $13 trillion of it. Hey, it was fun, wasn’t it?

Nothing bad happened. So now they can get rid of the debt… and nothing bad is going to happen again, right? The Fed bought the debt, adding money into the economy – especially the richest part of it. Now all they have to do is sell it. Easy-peasy.

Currency Component Of Japan, US and Euro Area, 1988 - 2016

- Click to enlarge

The main effect of the vast central bank balance sheet expansion discussed above was the creation of boatloads of deposit money & currency. US TMS-2, Japan M1 and euro area M1 (inserted chart) have grown like weeds – so someone does have all that money lying around somewhere. Alas, a reversal of QE will destroy it again. One guess as to what would happen to asset prices in that case – click to enlarge.

A lot of people have a spare trillion dollars lying around. They’ll consider it an honor to help the Fed down off the ledge and buy bonds just as the bond market turns south.

The hangover will be just as much fun as getting drunk. The divorce will be just as exhilarating as the affair that caused it. Getting hanged for murder will be just as satisfying as shooting the bastard.

Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.